Synchrony Is Enjoying Solid Loan Growth, but Credit Card Charge-Offs Will Continue to Rise

Equity Analyst

Michael Miller

Revenue segments as reported by the company.

Interest income

Interest expense

Revenue Segments

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Retailer share arrangements

Provision for credit losses

Other income

Other expense

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

Synchrony Financial partners with retailers and medical providers to offer promotional financing as well as private-label and co-branded general-purpose credit cards. While the company’s CareCredit cards and installment loans have consistently performed well, its private-label and co-branded credit cards, co-marketed through partnerships with retailers, can often face material headwinds when retail sales suffer.

The company has also had to contend with the loss of Walmart in 2018 and Gap in 2021. These were significant blows, as the Walmart credit card program was about 13% of Synchrony’s receivables at the time and the Gap credit card program was about 5%. Synchrony will likely continue to have to choose between revenue growth and margins as it is pressured at the negotiating table by its merchant partners to offer more-attractive revenue-sharing agreements. Additionally, the bank is facing the possibility of new regulations on late fees, which would have a material impact on revenue. While Synchrony does have options to offset some of the damage, this represents an additional near-term risk. 

That said, the future for Synchrony is not completely bleak. Repayment rates industrywide have normalized, and retail spending growth has been strong. The bank saw significant loan growth in both 2022 and 2023, more than offsetting the loss of Gap. New credit card programs with Venmo and Walgreens give avenues for Synchrony to add incremental growth, and the company has its own buy now/pay later option through Clover.

On the other hand, credit costs rose sharply in 2023, a trend we expect to continue into 2024. Synchrony had been enjoying net charge-offs well below normal levels for several years, but in 2023, net charge-offs industrywide have begun to increase rapidly, and Synchrony is no exception. That said, Synchrony’s rate of normalization has been slower than most of its peers, a surprising result given Synchrony’s historical credit positioning. Additionally, its balance sheet is strong, and while we do see higher net charge-offs on the horizon, we do not expect the bank to come under financial strain.

Business Strategy & Outlook

In our view, Synchrony Financial does not have an economic moat, as we do not believe it has a durable competitive advantage that will allow it to continue to earn excess returns on capital, particularly in light of the shift toward online purchases and the increasing size of digital retailers. Synchrony is the leading issuer of private-label credit cards by purchasing volume and by outstanding receivables, but its scale in the overall credit card market is more modest. Any weakness in private-label credit card growth will likely remain a headwind for Synchrony, as its co-branded general-purpose cards are only 23% of its interest income. Moreover, outside of its existing relationship agreements, Synchrony has no identifiable competitive advantage over any other major issuers of credit cards.

Historically, Synchrony’s retail card segment has been able to establish long-term relationships with major retailers using partnership agreements in which the retailer markets Synchrony’s credit cards through both physical and online channels. These partnership agreements are typically long, anywhere from five to seven years, and have historically been sticky, with most of Synchrony’s partners electing to renew repeatedly. The longevity of these partnership agreements has benefited Synchrony, but the switching costs faced by its partners have eroded over time, and the value proposition of Synchrony’s credit card partnerships has become more dependent on the payments it makes to its partners and their customers.

Synchrony provides value to its retail card partners in three ways. First, Synchrony makes direct payments to the retailer through retailer share arrangements. The specifics of these arrangements are negotiated when a partnership agreement is signed or renewed, and they transfer revenue from Synchrony to the retailer based on the economic performance of the credit card program. These retailer share arrangements are a significant expense. In 2019, Synchrony paid out more than $3.8 billion to its partners. Second, Synchrony’s credit cards use reward structures as an incentive for consumers to direct more of their spending to the retail partner. As credit card competition has increased and reward structures industrywide become more generous, Synchrony has been forced to follow suit, and over the last five years, the cost of these programs has grown at more than 21% per year. Finally, Synchrony provides retailers an easy way to collect valuable data on their customers. When customers sign up for one of Synchrony’s credit cards, they are providing the retailer with personal information that can then be tied to purchasing patterns. This data can be used to identify a retailer’s most active customers and then market to them directly using targeted offers. From the perspective of the retailer, Synchrony’s credit cards provide valuable data and reward its most valuable customers while also generating incremental revenue.

However, Synchrony’s credit cards are no longer the only way for retailers to collect this data. Online shopping by its very nature requires customers to create online accounts that provide retailers with the same personal information and purchase data. By the end of 2019, 39% of transactions with Synchrony’s cards occurred online, highlighting the overlap in data collection. Additionally, digital retailers have become an increasingly important part of Synchrony’s partnership base. In 2015, digital retailers were responsible for 7.7% of Synchrony’s interest income, but by 2019, this figure had risen to 20.4%. These new retailers benefit less from the data collection opportunity of Synchrony’s credit cards, and firms such as PayPal, Amazon, and Alphabet are unlikely to rely on Synchrony’s own data analytics. The diminished value of its data collection efforts makes it easier for retailers to switch credit card providers if they believe they can receive better terms elsewhere. 

Case in point: Walmart. In 2018, Walmart decided to not renew its agreement with Synchrony in favor of signing a new agreement with Capital One. This was a significant loss for Synchrony, as the Walmart partnership accounted for approximately 13% of Synchrony’s credit card receivables at the time. While there have been no other major defections since 2018, we believe that the loss of Walmart is a sign that bargaining power has swung toward Synchrony’s partners, particularly retailers sophisticated enough to have their own data analytics teams. Synchrony’s partners are likely to demand more from it, and the company will be forced to accept lower margins or risk losing more partners to competitors.

While the Walmart credit card portfolio itself was not sold until late 2019, Synchrony responded to the loss of Walmart by seeking partnership renewals with Lowe’s and JCPenney in 2018. Synchrony’s bargaining power was likely diminished in these negotiations, and the impact of Walmart’s defection can be seen in Synchrony’s margins. In 2019, retailer share arrangement spending in the retail card segment was 27.75% of interest and fee income compared with an average of 25.4% over the prior five years. This increased even further in 2020, establishing a trend of higher revenue sharing with Synchrony’s partners. Synchrony is likely to continue to endure difficult negotiations with its retail partners during contract renewals. The loss of the Gap portfolio to Barclays in 2021 reflects the firm’s continued challenges in maintaining its partner base.

Without meaningful switching costs to Synchrony’s partnership agreements, we do not see a way for Synchrony to retain high-margin business in its retail card segment without its partners attracting competitive bids from Synchrony’s rivals. Many of its competitors are much larger, have lower costs of funding, and have more identifiable brand names. While Synchrony’s ability to retain technologically sophisticated partners like Amazon and PayPal does speak to the company’s capabilities, without significant technology development spending, we find it unlikely that Synchrony can develop a defensible advantage in product capabilities. Given the lack of competitive advantage, Synchrony’s retail card’s return on equity is likely to trend lower.

Unlike the retail card segment, payment solutions and CareCredit are heavily diversified, reducing partner bargaining power, and do not have significant retailer share arrangement spending. Both segments work by providing promotional financing for large-ticket items to the partner’s customers, increasing sales conversion rates. The promotional financing comes in the form of either deferred interest (no interest for the first 12 months, for example) or a discounted initial interest rate. Typically, most customers pay their loans off before the end of the promotional period, leading to a higher degree of asset intensity, particularly in payment solutions. A key distinction for CareCredit is that it is a single credit card program that various medical practices agree to accept and market. Payment solutions mostly follows the same model as retail card, in which each retailer has its own program. 

Synchrony’s partners in these segments are typically not motivated by the ability to market to its customers since purchases are either driven by need or inherently irregular, like the purchase of a mattress. Most purchases that occur using Synchrony’s cards in these segments are one-time purchases. Historically, roughly 30% of purchases at payment solutions and 50% of payments though CareCredit have been repeat purchases. As a result, Synchrony’s payment solutions and CareCredit partners are largely only concerned with approval rates for applications. The partnership agreements that Synchrony signs in these segments are often not exclusive, which means that a retailer could be offering multiple financing options alongside Synchrony’s credit cards. As a result, Synchrony competes with all forms of consumer financing in these segments, and its partners are mostly interested in Synchrony’s ability to issue additional loans with large promotional discounts to facilitate their sales. 

The same is not true of CareCredit, where gross interest is comparable to the rest of the firm even though these partnership agreements do not include retailer share arrangement spending. It could be argued that the existence of a single CareCredit program means that there is a network effect to the card program. The more consumers with the card, the more valuable it is for providers to accept it, and vice versa. There is a potential opportunity to build a strong defensible franchise in this segment of Synchrony’s business. However, given the small size of CareCredit, any potential network effects in the segment are insufficient to justify a moat for the entire company.

None

Economic Moat

Synchrony Financial

Synchrony Financial engages in the provision of consumer financial services. It operates through three sales platforms: Retail Card, Payment Solutions, and CareCredit. The Retail Card platform is a provider of private label credit cards, and also provides Dual Cards and small-and medium-sized business credit products. The Payment Solutions platform is a provider of promotional financing for major consumer purchases, offering private label credit cards and installment loans. The CareCredit platform is a provider of promotional financing to consumers for elective healthcare procedures or services, such as dental, veterinary, cosmetic, vision and audiology. The company was founded on September 12, 2003, and is headquartered in Stamford, CT.

Earnings data Q3 2020

Earnings data Q4 2020

Earnings data Q1 2021

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

Synchrony Financial excels in Q4 2022, poised for growth

Synchrony Financial's Q4 2022 earnings call highlighted solid financial performance, capital management strength, digital innovation, and strategic partnerships. While facing challenges such as regulatory uncertainties and economic impacts on consumer behavior, the company is well-positioned to leverage opportunities in consumer demand and asset growth dynamics. Synchrony's proactive approach to business management and focus on customer experience enhancements underscore its resilience and growth potential.

Synchrony Financial excels in Q1 2023, eyes sustained growth

Synchrony Financial's strong performance in Q1 2023 underscores its effective dual card co-brand strategy and customer engagement initiatives.
While facing challenges such as seasonal trends and margin pressures, the company remains optimistic about consumer trends and its ability to manage risks.
With opportunities in sustained growth, regulatory approvals, and strategic capital planning, Synchrony is well-positioned to navigate market dynamics and deliver value to stakeholders.

Synchrony Financial (SYF) excels in Q2 2023, navigating challenges

Synchrony Financial (SYF) excelled in Q2 2023, demonstrating strong financial performance and strategic initiatives to drive growth and enhance customer engagement.
While facing regulatory uncertainties and expense challenges, the company's focus on innovation, prudent financial management, and strategic acquisitions positions it well for future success.
Opportunities in expanding product offerings, improving financial metrics, and strategic acquisitions present avenues for sustained growth and value creation for Synchrony.

Synchrony Financial reports robust Q3 results amidst credit challenges

Synchrony Financial's Q3 performance reflects operational strength, digital growth, and shareholder value focus amidst credit challenges.
The company faces revenue challenges in certain segments but benefits from strong partnerships, liquidity, and disciplined credit management.
Opportunities lie in product diversification, strategic partnerships, and maintaining credit performance discipline for long-term profitability.
Investors can expect continued focus on growth, risk management, and shareholder returns in Synchrony's strategic outlook.

Synchrony Financial excels in Q4, faces challenges and growth opportunities

Synchrony Financial's strong financial performance, strategic partnerships, and innovative solutions position it well for future growth.
Challenges in credit performance, evolving consumer trends, and potential regulatory impacts require a proactive and adaptive approach.
Opportunities in key growth areas and prudent capital deployment strategies can drive sustained success and shareholder value for Synchrony.

Synchrony Financial reports robust Q1 earnings amidst credit challenges

Synchrony Financial's Q1 performance showcased strong financial metrics and growth in accounts and purchase volume, with a focus on credit quality and shareholder value.
While facing challenges in credit trends and operational changes, the company is strategically positioned to navigate through potential headwinds and capitalize on growth opportunities.
With a commitment to operational efficiency, shareholder returns, and strategic partnerships, Synchrony Financial aims to maintain a strong financial position and drive long-term profitability.

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Synchrony Financial engages in the provision of consumer financial services. It focuses on digital, health and wellness, retail, telecommunications, home, auto, outdoor, pet, and other industries. The company was founded on September 12, 2003 and is headquartered in Stamford, CT.

STAMFORD, Conn., Oct. 20, 2020 /PRNewswire/ -- Synchrony Financial (NYSE: SYF) today announced third quarter 2020 earnings results amid the continuing Coronavirus (COVID-19) pandemic. Synchrony reported third quarter 2020 net earnings of $313 million, or $0.52 per diluted share; this...

Synchrony Reports Third Quarter Net Earnings of $313 Million or $0.52 Per Diluted Share

Synchrony Financial (SYF) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Is a Surprise Coming for Synchrony Financial (SYF) This Earnings Season?

Cedar Fair

Macerich

Sterling Bancorp

Stocks were set to sharply rise today after slumping for three days in a row. Today's tone has certainly shifted after jobless claims disappointed yesterday.

Top Stocks To Short Today As Dow Ends Losing Streak With Gains

FTAI Aviation Ltd

Pioneer Natural Resources

Texas Roadhouse

Markets are set to drop today for the third straight day amid a slew of bad news. Concerns are certainly rampant, and sentiment has sharply flipped this week after the first two weeks of October showed strong gains.

Top Stocks To Short Today As Markets Drop Amid Slew Of Poor News

Riding on strategic initiatives and solid segmental contributions, Synchrony Financial (SYF) holds potential to reap benefits for investors.

Why Should You Hold Synchrony Financial in Your Portfolio?

Synchrony (SYF) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Synchrony (SYF) Expected to Beat Earnings Estimates: What to Know Ahead of Q3 Release

STAMFORD, Conn., Sept. 25, 2020 /PRNewswire/ -- Synchrony (NYSE: SYF) plans to report its third quarter 2020 results on Tuesday, October 20, 2020. The earnings release and presentation materials are scheduled to be released and posted to the Investor Relations section of the Company's...

Synchrony to Announce Third Quarter 2020 Financial Results on October 20, 2020

American Express

Bank of America

Citigroup

Capital One

Discover

JPMorgan Chase & Co

While most credit card issuing banks record a decline in default rates for August 2020, the actual impact of economic slowdown is likely to be felt in the latter half of the year and even next year.

Banks' Credit Card Defaults Dip in August on Forbearances

Synchrony Financial Is Still Profitable

Bank of New York Mellon

Globe Life Inc

Kraft Heinz

Coca-Cola

M&T Bank

PNC Financial Services

Sirius XM Hlds

STORE Capital

Suncor Energy

U.S. Bancorp

Wells Fargo

Warren Buffett In September: 44 Equities Yield 7 Buy-And-Hold Dividend Picks

STAMFORD, Conn., Sept. 2, 2020 /PRNewswire/ -- Synchrony (NYSE: SYF) announced today that PEOPLE Magazine, in partnership with Great Place to Work, has ranked the company #8 on its 50 Companies That Care list for 2020 – topping the list for financial services companies.

Synchrony Tops PEOPLE's "Companies That Care" List for Financial Services Companies

Assurant

SVB Financial Group

Strength in major players of the S&P 500 leads to impressive performance in August in more than three decades. Some Finance stocks outperform the rally on company-specific fundamentals.

4 Finance Stocks That Beat S&P 500's Sizzling August Rally

Synchrony (SYF) reported earnings 30 days ago. What's next for the stock?

Synchrony (SYF) Up 5.2% Since Last Earnings Report: Can It Continue?

Goldman Sachs

Moody's

StoneCo

Berkshire Hathaway began buying Bank of America significantly in July after maintaining its position in the company and reducing its stake in many bank holdings in Q2.

Why Warren Buffett May Already Be Feeling Better About the Banking Sector

While credit card issuing banks record a decline in default rates for July 2020, the actual impact of economic slowdown is likely to be felt in the latter half of the year.

Banks' Credit Card Defaults Down in July on Forbearances

American Eagle Outfitters

MGM Resorts

Marathon Petroleum

Plains All American Pipeline

Given the rally of over 44% from the lows made in March for the S&P 500, it might take a lot of good news to keep the upward move going.

Best Stocks To Short Today Amid Gold’s Record-Breaking Run

This Buffett list from Dogs of The Dow first appeared 5/20/20 online. YCharts also

Warren Buffett August Update: 46 Equities Show 7 Ready To Buy And Hold For Dividends Today

STAMFORD, Conn., July 22, 2020 /PRNewswire/ -- Synchrony (NYSE: SYF), a premier consumer financial services company, today announced P.W.

Synchrony Names Bill Parker to Board of Directors

Synchrony Financial: Bad News Seems Already Priced In

Conservatively Reserved, Synchrony Financial Is A Buy

Synchrony Financial (SYF) CEO Margaret Keane on Q2 2020 Results - Earnings Call Transcript

Boyd Gaming

Comerica

Kohl's

Matador Resources

Dow is up over 300 points, Nasdaq has retreated after hitting a record high, and sentiment has improved following news of a European stimulus package. Mark Cuban says this rally reminds him of the dot-com bubble and to not get greedy.

Best Stocks To Short Today As Dow Jumps 300 Points Following Strong Earnings Results

Synchrony Financial's (SYF) second-quarter results reflect lower expenses, partly offset by the COVID-19 impact.

Synchrony Financial's (SYF) Q2 Earnings Beat, Tumble Y/Y

Synchrony (SYF) delivered earnings and revenue surprises of 50.00% and 4.51%, respectively, for the quarter ended June 2020. Do the numbers hold clues to what lies ahead for the stock?

Synchrony (SYF) Q2 Earnings and Revenues Surpass Estimates

STAMFORD, Conn., July 21, 2020 /PRNewswire/ -- Synchrony Financial (NYSE: SYF) today announced second quarter 2020 earnings results amid the continuing Coronavirus (COVID-19) pandemic.

News for Synchrony Financial Stock (SYF)